APB APPROVAL OF AMENDMENTS AND REMOVAL OF AN ED
Accounting Pronouncement Approved
At a meeting held on 16 May 2008, the Accounting Practices Board (APB) approved the Amendments to IAS 32(AC 125) – Financial Instruments: Presentation and IAS 1 (AC 101) – Presentation of Financial Statements: Puttable Financial Instruments and Obligations Arising on Liquidation for issue as a Statement of Generally Accepted Accounting Practice (GAAP).
The amendments classify the following types of financial instruments that meet the definition of financial liabilities, as equity provided they have particular features and meet specific conditions:
puttable financial instruments (for example, some shares issued by co-operative entities); and
instruments, or components of instruments, which impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation (for example, some partnership interests and some shares issued by limited life entities).
The amendments are effective for annual periods beginning on or after 1 January 2009, although entities are permitted to adopt the amendments earlier. The documents are available on the SAICA handbook-on-line .
Exposure Draft Removed
ED 215 − Amendments to IAS 32 – Financial Instruments: Presentation and IAS 1 – Presentation of Financial Statements: Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation, has been removed due to the issue of the above amendments.
CONSULTATIVE DOCUMENTS ON THE CONCEPTUAL FRAMEWORK
The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published consultative documents that seek public comment on two of the eight phases of their joint project to develop an improved conceptual framework. The objective of the project is to develop an improved conceptual framework that provides a sound foundation for developing future accounting standards.
Exposure draft of Chapter 1 and Chapter 2 of the Framework
The first document published is an exposure draft of Chapter 1 and Chapter 2 of the framework. This document has been issued in South Africa as ED 240 − An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information.
It seeks views on an improved objective of financial reporting, the qualitative characteristics of information provided by financial reporting and constraints on the provision of that information. The draft reflects the board’s updated proposals in the light of comments received on an initial consultation document published in July 2006. The exposure draft now proposes that the objective of financial reporting is to provide financial information that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers.
It also presents an improved description of ‘faithful representation’, one of the qualitative characteristics that financial information should possess if it is to provide a useful basis for economic decisions.
Preliminary views on the reporting entity concept
The second document, published as a discussion paper, sets out both boards’ preliminary views on the reporting entity concept and related issues. This discussion paper has been issued in South Africa as ED 241 − Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity.
Although the reporting entity concept determines some important aspects of financial reporting, the boards’ existing frameworks do not address it specifically. The boards’ preliminary views are that:
• a reporting entity is a circumscribed area of business activity, of interest to present and potential equity investors, lenders and other capital providers;
• control is the basis for determining the composition of a group reporting entity; and
• consolidated financial statements should be prepared from the perspective of the group reporting entity.
The above EDs can be downloaded from the SAICA Website and their SAICA comment deadline is 1 September 2008.
PREFACE REVISED FOR COMPANIES ACT CHANGES
The process followed for exposure and approval of Statements of Generally Accepted Accounting Practice (GAAP) is currently undergoing change. The Corporate Laws Amendment Act No. 24 of 2006 (CLAA) changed the Companies Act No. 61 of 1973(CA) and came into effect on 14 December 2007. Section 440P(1) of the Companies Act establishes a new accounting standard-setter in South Africa: a body corporate entitled the “Financial Reporting Standards Council” (FRSC) or (Council). The FRSC is not yet operational, and therefore standard setting is still being carried out under the auspices of the Accounting Practices Board (APB).
The Preface to Statements of GAAP has therefore been revised to include the objectives and membership of the APB and the FRSC and explains the process followed for exposure and approval of Statements of GAAP, followed by the APB, and as detailed in the revised Companies Act for the FRSC.
IMPACT OF AMENDMENTS TO IAS 32 (AC125)
Previously we have communicated the amendments to IAS 32(AC 125) – Financial Instruments: Presentationand IAS 1(AC 101) – Presentation of Financial Statements: Puttable Financial Instruments and Obligations Arising on Liquidation. These amendments may be relevant for various industries such as co-operatives, clubs, partnerships and collective investment schemes, private equity funds and hedge funds.
Typically these are entities that report little or no equity in terms of IFRS, but disagree with the treatment of some of their instruments as liabilities under IFRS, because they believe them to be equity in substance. Accordingly, these entities would not have previously shown any profit in terms of IFRS, when the reality is that they are earning profits for their investors. The amendments to IAS 32 (AC 125) may change this.
An example is the collective investment scheme industry where, historically, the financial statements have not been prepared based on South African Statements of Generally Accepted Accounting Practice (SA GAAP) or International Financial Reporting Standards (IFRS), because the Collective Investment Schemes Control Act, 2002 does not currently require one of these frameworks. The basis of preparation has been aligned to the basis on which the funds are priced rather than one of the recognised frameworks. There has, however, been a move by some funds to apply either SA GAAP or IFRS over the past few years, and the debt/equity debate is particularly relevant in this industry. Under the historical basis the unit holders’ interest in the fund has always been accounted for as equity, but under SA GAAP or IFRS there is a strong argument that the unit holders’ interest should be accounted for as debt because this interest is akin to a puttable financial instrument. (The investor, through the fund manager, can liquidate his/her investment in the fund as and when he/she wishes, provided it is done in terms of the fund’s trust deed.)
The recent amendments to IAS 32(AC 125) have reopened the debt/equity debate, and collective investment schemes should now consider the impact of these amendments and assess whether the unit holders’ interests should still be accounted for as debt or whether they can be treated as equity. The amendments allow only the most subordinate class of instrument to be classified as equity and, therefore, schemes would need to consider whether all classes of unit holders rank equally or whether there may be one class that is more subordinate than others.
REVISED AC 503 – ACCOUNTING FOR BLACK ECONOMIC EMPOWERMENT (BEE) TRANSACTIONS OPEN FOR COMMENT
AC 503- Accounting for Black Economic Empowerment (BEE) Transactions has been revised in light of the amendments to IFRS 2(AC 139) – Share-based Payment. The definition of vesting conditions has been amended and guidance on the accounting treatment of non-vesting conditions has been added. These amendments will become effective for annual periods beginning on or after 1 January 2009. SAICA has published for public comment ED 242 – AC 503 – Accounting for Black Economic Empowerment (BEE) Transactions, which incorporates these amendments to IFRS 2(AC 139).
Reasons for Revising AC 503
AC 503 was initially issued by the APB to provide guidance on how to account for Black Economic Empowerment Transactions in the context of IFRS 2(AC 139) in 2006. In January 2008, amendments to IFRS 2(AC 139) – Vesting Conditions and Cancellations were issued, and these amendments will become effective for annual periods beginning on or after 1 January 2009.
As a result of the amendments to IFRS 2(AC 139), AC 503 has been revised to take into account the amended definition of vesting conditions and the accounting treatment of non-vesting conditions. The definition of vesting conditions prior to the amendments stated that “The conditions that must be satisfied for the counterparty to become entitled to receive cash, other assets or equity instruments of the entity, under a share-based payment arrangement. Vesting conditions include service conditions, which require the other party to complete a specified period of service and performance conditions, which require specified performance targets to be met (such as a specified increase in the entity’s profit over a specified period of time).” Under the amended definition of vesting conditions, performance conditions require that an entity completes a specified period of service in addition to meeting certain performance targets, whereas this previously was not the case. Vesting conditions are defined under the amended IFRS 2(AC 139) as “The conditions that determine whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity, under a share-based payment arrangement. Vesting conditions are either service conditions or performance conditions. Service conditions require the counterparty to complete a specified period of service. Performance conditions require the counterparty to complete a specified period of service and specified performance targets to be met (such as a specified increase in the entity’s profit over a specified period of time). A performance condition might include a market condition.”
Prior to these amendments, no guidance was provided as how non-vesting conditions in a share-based payment arrangement should be accounted for and recognised. Paragraph 21A has been added to IFRS 2(AC 139) to serve this purpose. This paragraph states that “Similarly, an entity shall take into account all non-vesting conditions when estimating the fair value of the equity instruments granted. Therefore, for grants of equity instruments with non-vesting conditions, the entity shall recognize the goods or services received from a counterparty that satisfies all the vesting conditions that are not market conditions (e.g. services received from an employee who remains in service for the specified period of service), irrespective of whether those non-vesting conditions are satisfied.” (emphasis added)
The following sections and paragraphs of AC 503 have been thus revised as a result of the amendments to the definition of vesting conditions and paragraph 21A, which were brought about by IFRS 2(AC 139) – Amendments to Vesting Conditions and Cancellations;
• Issue 3 paragraphs 18 to 19.
• Illustrative Examples 4 and 5 from paragraph IE9 to IE13.
• Issue 3 in the Basis for Conclusions from paragraph BC41 to BC73.
EXTRACTIVE ACTIVITIES RESEARCH PROJECT
At the June 2008 International Accounting Standards Board (IASB) meeting, the IASB considered the research presented by the project team on the initial recognition of minerals and oil and gas reserves and resources. South Africa, Australia, Canada and Norway comprise the project team.
The research team applied the Framework’s asset definition and recognition criteria as well as the Board’s current thinking in the conceptual framework project. At present, it is common for entities to capitalise costs or recognise them as expense according to the different phases of upstream extractive activities, such as exploration and evaluation, development and production.
Asset definition and recognition
The project team considered that the economic resource, which relates to minerals or oil and gas, could be identified as the following three types of assets:
• Legal rights, such as exploration rights or mineral rights.
• Information (or knowledge).
• The minerals or oil and gas deposit.
It was noted that these assets can be viewed as forming a continuum representing the maturing of upstream extractive activities from early stage prospecting and exploration activities through to the extraction of minerals or oil and gas from the ground. Which asset or assets should be recognised would depend on where the extractive activities operation is along the continuum.
IASB members agreed that a legal rights asset should be recognised when the rights are acquired. The information obtained from exploration and evaluation activities generates a better understanding of the economic resource that underlies the legal rights asset and is therefore an enhancement of that asset, rather than a separate asset. IASB members suggested that the asset associated with a minerals or oil and gas deposit is the right to extract the minerals or oil and gas contained in the deposit.
Unit of account
IASB members concurred with the project team’s view on limiting the geographical size of the unit of account. For exploration activities, the unit of account would be defined according to the exploration rights held and, as more exploration and evaluation take place, the size of the unit of account would contract to cover only the specific area(s) where detailed exploration and evaluation are taking place. During the development and extraction phases, the unit of account would be no greater than a contiguous area or areas for which the legal rights are held and which is managed separately and would generate largely independent cash flows.
IASB members also discussed infrastructure and equipment assets associated with a developed property and noted that the components approach in IAS 16 may be useful in considering which assets should be recognised separately from the legal rights.
Next steps and discussion paper
The project team was asked to bring an analysis of disclosure issues, together with an outline of the proposed discussion paper, to a future meeting. The discussion paper is intended to be ready for publication by the end of 2008.
The Auditing Profession Act
The Independent Regulatory Board for Auditors (IRBA) is in the process of preparing amendments to the Auditing Profession Act. These proposed amendments will be submitted to the National Treasury in the latter part of the year and will follow the standard legislative processes. SAICA will actively engage in the comment process through its Auditing Guidance Committee.
Accreditation of SAICA
The IRBA accredited the first Professional Institute in terms of the Accreditation Model as provided for by the Auditing Profession Act. Full accreditation has been granted to SAICA.
Previously, the IRBA recognised SAICA’s programmes in terms of the Public Accountants’ and Auditors’ Act, 1991.
As an accredited institution, SAICA will now be subject to ongoing monitoring by the IRBA, which allows the professional body and the IRBA the opportunity to co-operate with a view to seeking improvements in the profession.
The JSE has amended its proposed changes to its Listing Requirements pertaining to the suggested “Auditor Register” and the need for IFRS advisors, incorporating comments received from third parties including SAICA. The effective date of the amended Listing Requirements is 1 September 2008.
ACCOUNTING STANDARDS BOARD
The Accounting Standard Board (ASB), during its meeting on 20 June 2008, approved exposure draft ED 49 – Employee Benefits. Comment on the ED is requested by 30 September 2008.
The standards, exposure drafts, discussion papers and updates of the Board are available on the Board’s website (www.asb.co.za).
EFFECTIVE DATES OF GRAP STANDARDS
The Minister of Finance issued Government Gazette No 31021 on 9th of May 2008 that prescribed the effective date of 17 Standards of Generally Recognised Accounting Practice (GRAP) for public entities, constitutional institutions, municipalities and municipal entities. The ASB has issued a communication clarifying the implementation dates of the Standards of GRAP. Both the Gazette and the communication can be downloaded from the ASB website.
WHAT’S NEW AT SARS?
The latest updates can be viewed on the SARS website (www.sars.gov.za).
SAICA SUBMISSION TO SARS
The following had been issued in June 2008:
Call for Comment – Comprehensive Guide
TAX PRACTITIONERS BILL
SARS issued the revised draft Regulation of Tax Practitioner Bill on 3 June 2008 for public comment. The public comment process was accompanied by a consultation process between SARS and the professional associations that commented on the initial draft. SAICA provided comment and recommendations on the initial draft.
The most significant changes include the following:
• Tax practitioners that are under statutory regulation by another relevant statutory body (e.g. the Independent Regulatory Board for Auditors [IRBA]) or are regulated by the High Court of South Africa (i.e. the legal profession) will only be required to register with SARS in terms of the revised draft Bill, but will be subject to the disciplinary and other procedures of the other body.
• The concept of a reportable irregularity will not be pursued.
• The board size will be reduced and at least three of the seven board members will be appointed by the Minister from nominations by the tax practitioner community.
• The decriminalisation of the code of conduct.
The draft revised Bill makes provision for the Minister to exclude a person whose profession is regulated by law through a statutory body that is similar to the bodies and professions identified in the exclusion clause, e.g. the IRBA.
Comment is invited from members for consideration by the National Tax Committee [NTC]. SAICA through members of the NTC provided comment to SARS in this regard. SAICA’s submission is available on SAICA’s website.
SECURITIES TRANSFER TAX
From 1 July 2008, a new tax applies to the transfer of securities. The Securities Transfer Tax Act (STTA) applies to the transfer of listed and unlisted securities on or after 1 July 2008. The STTA replaces Stamp Duties and Uncertificated Securities Tax on marketable securities. The tax rate is 0,25%, to be applied to the taxable amount in respect of any transfer of a security.
STT is a tax levied on every transfer of a security.
A security in essence means any –
share in a company;
member’s interest in a close corporation; or
right or entitlement to receive any distribution from a company or close corporation.
Only securities issued by:
companies incorporated, established or formed inside the Republic; and
companies incorporated, established or formed outside the Republic, which are listed on a South African exchange, are taxable.
Further details are available on the SARS website.
VAT REGISTRATION THRESHOLD: SARS ISSUES MEDIA STATEMENT
SARS issued a media statement, which confirms that the VAT registration threshold remains unchanged at R300 000. Due to public uncertainty and confusion, SAICA has requested that SARS issue a media statement to clarify the present position.
SARS cites the following as the reason for not giving effect to the increase in the threshold registration:
“The intention is that the increase will coincide with the introduction of the simplified presumptive turnover tax for very small businesses in 2009. Although some of the principles of the presumptive tax have been announced, a number of matters remain to be dealt with and refined after consultation with small business.”
SAICA therefore welcomes this media statement. The media statement is available on the SARS website.
Edited by: Ewald Muller
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EXCHANGE CONTROL CIRCULARS
The Exchange Control department of the South African Reserve Bank (EXCON) has issued the following four Exchange Control Circulars:
No. 9/2008 – Foreign direct investments outside the Common Monetary Area by South African Companies.
Section B.2(B)(ii) of the Exchange Control Rulings (the Rulings) has been amended to accommodate the various issues raised relating to Exchange Control Circular No. 6/2008 – Foreign direct investment outside the Common Monetary Area by South Africa Companies. A definition of foreign direct investment has also been added to Section A.1 of the Rulings.
No. 10/2008 – Inward foreign loans
Section I.3 of the Rulings has been amended.
No. 11/2008 – Amendments to the Exchange Control Rulings
Various sections of the Rulings have been amended.
No. 12/2008 – Securities Control – Authorised Bank/CSD Participant/Settlement Agent
Subsections G.(A)(iii)(j), (k) and (l) of the Exchange Control Rulings (the Rulings) have been amended to reflect changes contained in the list of names under the heading of FirstRand Bank Limited. The name of FirstRand Treasury-Custody Services has been deleted and substituted with FNB Custody Services.
Please direct any specific queries regarding the Exchange Control Circulars or Rulings to email@example.com.